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Title: The risk and return conundrum explained: international evidence
Authors: Savva, Christos S. 
Theodossiou, Panayiotis 
Keywords: Downside risk;National stock markets;Risk premium;Skewed generalized t;Skewness premium;Upside uncertainty
Category: Economics and Business
Field: Social Sciences
Issue Date: Jun-2018
Publisher: Oxford University Press
Source: Journal of Financial Econometrics, 2018, Volume 16, Issue 3, Pages 486-521
Journal: Journal of Financial Econometrics 
Abstract: The relationship between risk and expected returns has been investigated extensively in the financial economics literature. Theoretical models generally predict a positive relation between the two. Nevertheless, the empirical findings so far have been inconclusive. Using a generalization of the analytical framework developed by Theodossiou and Savva (2016) along with time-varying asymmetry, linked to the upside and downside uncertainty, the risk-return puzzle is investigated across international stock markets. The investigation reveals that the contradictory findings are the result of ignoring the impact of skewness on the total price of risk. That is, in the absence of skewness the relationship between risk and return is positive as depicted by finance theory. However, negative skewness results in lowering the total price of risk and in some cases reverting its sign from positive to negative.
ISSN: 14798409
DOI: 10.1093/jjfinec/nby014
Rights: © The Author(s) 2018. Published by Oxford University Press. All rights reserved
Type: Article
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